With Portugal now facing a financial crisis and the need of a bailout, the question is one of how the dominoes may fall. Spain and Italy are becoming nervous after the austerity experiences of Ireland and Greece in 2010-2011. Despite Germany’s very strong GDP growth and its prospects, the EU is in trouble unless it undertakes a new course of action that goes beyond bailing out banks. I have pointed out on numerous postings that the EU integration model was founded on “inter-dependency,” namely, the stronger northwestern EU countries would help with subsidies lift the weaker southern and Eastern members.
Because of Maastricht Treaty’s (1992) rigid rules on members to keep annual fiscal deficits below 3%, the EU never had in place mechanisms to effectively deal with countries that experienced default-like conditions in case of global recession, any more than it had mechanisms for countries that simply lied about exceeding the treaty’s terms. It is now public knowledge that EU officials were allowing the weaker countries in the union to spend at much higher levels than Maastricht permitted and to illegally strike swaps deals with Goldman Sachs. Banks and multinational corporations like Siemens, MANN, Deutsche Bank, Hypo Real Estate, etc., in the stronger countries decapitalize the weaker EU members through direct and portfolio investment; a situation made worse by the much higher level of official corruption in EU’s debtor countries concentrated in the south and east.
In essence this means that the EU is creating a two-tiered economy with the strong and thus hegemonic economies on the northwest tier and the weaker and “dependent” economies in the south and east. Especially amid this crisis, creditor countries demand from weaker EU members lower taxes for direct foreign investment, fewer restrictions on capital movement, liberalization of all vital sectors of the economy, including privatization of public enterprises so that foreign investment penetrates and eventually dominates such sectors.
In return, they extend loans with interest rates higher than most home mortgages, and they saddle the debtor countries with cumulative foreign debt that will keep them perpetually dependent in every respect, from finance and trade to technology and essential pharmaceuticals. Many analysts in the West, as well as die-hard advocates of what is euphemistically called “free” enterprise (instead of state-supported corporate welfare system) insist that debtor countries are solely responsible for their own problems and financial demise. Therefore, “they must get their own house in order,” as though it was ever their own house and not a rental from northwest EU’s powerful banking houses.
In the campaign to impose austerity on the weaker members, creditor countries in collaboration with the IMF and European Central Bank are providing legitimacy to the financial and economic chaos that they are creating. They insist that “austerity”– under formalized agreements or simply as piecemeal policies – is the only solution, when in fact there is no end to policy mixes that could be adopted, depending on what sector the state wants to advance and what social group it wants to retard. Unless creditor countries agree to loan restructuring that entails debt forgiveness for a large percentage of the debt, EU member and associate members which are currently debtor countries and under some formal or informal austerity program will be reduced to “Third World” status and they will suffer cyclical debt crises like Latin America and Africa.